Optimise your working capital
As a business owner, you know that sufficient working capital is essential to keep your business running smoothly and meet your daily financial obligations. Working capital allows you to pay suppliers, pay salaries and buy new inventory. But how do you ensure that your working capital remains at the right level, so you meet your financial obligations smoothly?
What is working capital?
Working capital is the assets you use as a business owner to meet your day-to-day financial obligations. This includes inventories, accounts receivable and cash you need to make staff costs, rental costs and supplier payments, for example. Working capital is your short-term financial cushion, allowing you to pay your bills on time and continue your business activities without hindrance.
Calculate your working capital
Calculating your working capital is relatively simple. Your gross working capital is the sum of your inventory, debtors, and cash. To determine your net working capital, you subtract your current liabilities. This calculation will give you a clear picture of your current working capital position.
Gross working capital = stock + debtors + cash and cash equivalents
Net working capital = gross working capital - creditors
What is a healthy working capital?
Finding the right balance for your working capital is essential. Working capital that is too high means your money is tied up in inventories or debtors, limiting your investment opportunities. On the other hand, working capital that is too low causes problems in meeting your financial obligations, leading to payment problems.
Too much or too little working capital?
To determine whether your working capital is healthy, you use the ‘current ratio’ or ‘quick ratio’. The current ratio shows the ratio of your current assets (including cash) to your current liabilities. A ratio above 1 indicates that you have sufficient working capital to meet your financial obligations.
The quick ratio, on the other hand, calculates the same ratio but without including inventories. This can be useful if you don’t expect inventories to convert to cash quickly.
Current Ratio = current assets (including cash and cash equivalents) / current liabilities
Quick Ratio = (current assets (including cash and cash equivalents) - inventories) / current liabilities
Improve your working capital
If you notice that your working capital needs improvement, there are several steps to take:
- Optimise your inventory: Analyse which products sell well and which sell less. Avoid money being tied up in unsold stock.
- Invoice on time: Ensure a good invoicing process to receive payments faster.
- Check creditworthiness: Reduce the risk of defaults by checking the creditworthiness of new customers.
- Work with multiple suppliers: This increases your flexibility and continuity.
- Explore tax opportunities: Explore what tax opportunities you have to balance your working capital.
- Create space for yourself: Agree payment terms with suppliers to create financial space.
- Pay faster in exchange for discounts: If you have positive working capital, you can pay suppliers faster in exchange for discounts.
Optimise your working capital with Payt
Managing and optimising your working capital can be challenging. Fortunately, Payt helps you do just that. With our automated accounts receivable management software, you get better insight into your outstanding invoices and receive payments faster. This improves your cash flow and reduces the likelihood of payment problems. Find out how Payt helps you optimise your working capital and keep your business financially healthy.
Schedule an online demo
Curious about the benefits of Payt for your organisation? Schedule your personal online demo with Aziz! You will receive an interactive demonstration of our platform for accounts receivable management, without any obligations.